I have spoken in prior Real Money columns of my admiration of the work of John Butters and his team at FactSet. Their Earnings Insight piece is a weekly must-read. With the Federal Open Market Committee dropping its "accommodative" stance--take that with a grain of salt, of course, since the New York Fed owned $3.989 trillion of Treasury and Agency securities as of last week--earnings will once again come to the fore.
The story of 2018 from an earnings perspective has been the impact of the Republican tax reform bill on corporate profits. Before that bill passed, I had a regional bank CFO whisper to me at a conference in an almost-conspiratorial tone: "it will drop straight to the bottom line." Yes lowering the corporate tax rate from 35% to 21% did in fact goose earnings, and for the full year, the expectation is for 20.4% growth in S&P 500 earnings per share with 3Q2018 EPS forecast to grow 19.3%.
Citi strategist Tobias Levkovich was on CNBC yesterday quoting Butters' research, specifically the fact that 74% of the companies in the S&P 500 that have provided guidance for September quarter earnings have issued negative guidance, a higher percentage than usual. I have followed Tobias since he was a machinery analyst back in the rating 1990s, and anyone who has followed earnings from Caterpillar (CAT) , Deere (DE) and the like knows how hard they are to predict. Operating leverage is very difficult to accurately forecast, and analysts following the energy sector seem to always miss forecasts for Exxon (XOM) and Chevron (CVX) , as well.
So, earnings misses can be expensive for active managers, and Butters and team noted individual companies that have seen the largest changes in 3Q earnings forecasts by sector. The largest EPS estimate reductions have come in the Energy, Consumer Staples, and Consumer Discretionary sectors, while Telecom Services has seen the largest EPS estimate increase. That is just super research, and I am grateful to be able to share it with you here. Price changes are as of last Friday, and earnings estimates represent FactSet consensus.
What you should be looking for are divergences; rising estimates and falling stock price represents a buying opportunity, and obviously the opposite scenario is not bullish, at all. So, by S&P sector, here are the companies with the largest changes in this quarter's estimates since the end of June:
Energy:
Halliburton (HAL) (to $0.51 from $0.70), Noble Energy (NE) (to $0.19 from $0.26), and Valero Energy (VLO) (to $1.93 from $2.35). The decrease in the mean EPS estimates for Exxon Mobil (to $1.27 from $1.35), Valero Energy, Chevron (to $2.11 from $2.20),The stock prices of Chevron (-4.7%) and Halliburton (-9.6%) have declined over this period, while the stock prices of Exxon Mobil (+3.0%) and Valero Energy (+1.4%) have increased during this time.
Consumer Staples:
Coty (COTY) (to $0.07 from $0.14), Tyson Foods (TSN) (to $1.31 from $1.88), and Kraft Heinz (KHC) (to $0.83 from $0.93). The decrease in the mean EPS estimates for Philip Morris International (PM) (to $1.29 from $1.43), Tyson Foods, and Kraft Heinz have been the largest contributors to the decrease in expected earnings for this sector since June 30. The stock prices for both Tyson Foods (-9.3%) and Kraft Heinz (-7.9%) have decreased since the start of the quarter, while the stock price for Philip Morris (+2.7%) has increased during this period.
Consumer Discretionary:
The decrease in the mean EPS estimates for General Motors (GM) (to $1.34 from $1.63), Lowe's Companies (LOW) (to $1.04 from $1.27), and Ford Motor (F) (to $0.32 from $0.37) have been the largest contributors to the decrease in expected earnings for this sector since June 30. While the stock prices for both General Motors (-8.4%) and Ford Motor (-11.0%) have decreased since the start of the quarter, the stock price for Lowe's Companies (+22.4%) has increased over the time frame.
Telecom Services:
All 3 companies in this sector have seen an increase in their mean EPS estimate during this time, led by CenturyLink (CTL) (to $0.31 from $0.24). However, the increase in the mean EPS estimate for AT&T (T) (to $0.93 from $0.88) is the largest contributor to the rise in expected earnings for this sector since June 30. The stock price for this company has increased by 6.0% over this same period.
